At First Glance

Some things look really impressive at first glance. Walking on burning wood is a perfect example, which John Allen Paulos writes about Innumeracy: Mathematical Illiteracy and Its Consequences:

The practice has often been cited as an example of “mind over matter” and you don’t have to be innumerate to be impressed initially with such a feat. What makes this phenomenon less remarkable is the relatively little-known fact that dehydrated wood has an extremely low heat content and very poor heat conductivity. Just as it’s possible to put your hand into a hot oven without burning yourself as long as you don’t touch the metal oven racks, a person can walk quickly across burning wood coals without any serious harm to his feet. Of course, quasi-religious talk about mind control is more appealing than a discussion of heat content and conductivity.

Numbers can be misleading because we tend to take them at face value. They provide information ten times faster than context and nuance. Take a look at the statistics and you’ll conclude that Walt Bellamy was one of the greatest basketball players ever. He’s one of just nine players in the 20,000 points and 14,000 rebounds club. The other 8 are Kareem, Karl Malone, Shaq, Moses Malone, Elvin Hayes, Tim Duncan, Garnett, and Robert Parish. So quite the body of work, right? Well, yea, sort of. In the Bill Simmons Book of Basketball, he throws some cold water on his greatness, writing:

He averaged a 29-17 during his first three seasons–1961-1963, before the league got bigger…and never made another all-star team after ’64….His teams never won–in fact, Bellamy’s teams won just two playoff series and dealt him twice in his prime…The great George Kiseda even wrote, “Walt Bellamy is the skeleton in the closet of the 20,000 point club.”

Finance can be a tricky place to navigate when armed with the requisite information. At first glance it’s a minefield. How much would you invest in a fund that compounded at 13.9% annually over twenty years when the S&P 500 did 9.2% over the same period? I know you would be careful, but the average investor who doesn’t read this blog would be very excited by these numbers. This fund that destroyed for two decades got destroyed shortly thereafter. Over the next four years, it would lose 43% of its value. Well, surely stocks must have had a rough time too right? Wrong. The S&P 500 grew 57% over the same time. I’m talking about John Paulson’s fund, which looked amazing at first glance. In the nine years since the GFC, Paulson is down 21%. The S&p 500 is up 259%.

I’m not saying people could have known that Paulson would suffer a lost decade after The Greatest Trade Ever, but really, how often do once in a lifetime trades happen? If you ever felt a visceral reaction to something in the world of finance, take a second to slow down. Even facts can be misleading.